Globalization

Globalisation is a complicated phenomenon that aims to increase global interdependence and

integration by establishing networks and activities that cross economic, social, and geographical
boundaries, resulting in a world without borders.

 Globalisation is a notion that deals with numerous types of fluxes within different parts of
the world, such as ideas, capital, commodities, people, and so on

 These continuous flows are what give rise to and keep ‘global interconnectivity’ alive

 Globalisation is a multifaceted notion that encompasses political, economic, and cultural

aspects

Process of Globalization
Certainly! The main driving forces of globalization can be summarized as follows:

1. **Technological Advancements:** Sophisticated technology, especially the internet and

communication advancements, has significantly reduced costs and enhanced the capability for
companies, even small ones, to access global markets efficiently and inexpensively.

2. **Liberalization of Cross-Border Trade:** Governments have gradually reduced restrictions on

international trade and resource movement due to citizen demand for greater variety and lower
prices, which encourages efficiency among domestic producers and aims to persuade other
countries to reciprocate by lowering their barriers.

3. **Services Supporting International Business:** Financial and technological services, often

produced by foreign countries and companies, play a dominant role in the global economy.

4. **Consumer Influence:** High consumer expectations, fueled by access to information online,

drive companies to offer quality products at competitive prices to survive in a globally competitive
market.

5. **Global Competition:** The pressure of competition, both current and potential, encourages
companies to explore foreign markets, introduce competitive products, and seek mergers or
acquisitions for market share and operational efficiency.

6. **Changing Political Landscapes:** The shift from a divided world to increased global cooperation
post-Cold War has facilitated trade between previously isolated regions, leading to the flourishing of
international business.

7. **Governmental Support and Cooperation:** Governments recognize the benefits of

international cooperation through treaties and agreements to address mutual interests, solve global
problems, and deal with issues that transcend national boundaries more effectively.

These factors collectively propel globalization by facilitating cross-border interactions, trade

liberalization, technological connectivity, and collaborative efforts among nations and businesses.

### Advantages of Globalization:

1. **Maximization of Economic Efficiencies:** Globalization allows countries to specialize in the
production of goods and services where they have a comparative advantage, leading to increased
efficiency and overall economic growth.

2. **Enhancing Trade:** Globalization facilitates increased international trade by reducing barriers,

fostering competition, and providing more choices for consumers, thereby potentially lowering
prices.

3. **Increased Cross-border Capital Movement:** Globalization enables the flow of capital across
borders, allowing for investments in different countries, which can lead to economic development
and growth opportunities.

4. **Improves Efficiency of Local Firms:** Exposure to global markets can encourage local firms to
improve their efficiency, adopt better practices, and innovate to compete on a global scale.

5. **Increases Consumer Welfare:** Greater access to a variety of goods and services from around
the world can benefit consumers through more choices, potentially lower prices, and access to
higher-quality products.

### Disadvantages of Globalization:

1. **Developed versus Developing Countries: Unequal Players in Globalization:** Developing

countries often struggle to compete with developed nations due to unequal access to resources,
technology, and markets, which can widen the economic gap between them.

2. **Widening Gap between the Rich and the Poor:** Globalization can exacerbate income
inequality within and between countries, with wealth often concentrated in the hands of a few,
leading to social and economic disparities.

3. **Wipes out Domestic Industry:** Some domestic industries in developing countries may be
unable to compete with cheaper imports, leading to the decline or elimination of local industries and
loss of jobs.

4. **Leads to Unemployment and Mass Lay-offs:** Shifting industries or outsourcing labor to lower-
cost regions can result in job losses and mass layoffs in certain sectors or regions.

5. **Brings in Balance of Payments Problems:** Import-heavy economies might face trade deficits,
leading to economic imbalances and reliance on foreign borrowing, potentially affecting national
economies.

6. **Increased Volatility of Markets:** Globalization can lead to increased market volatility due to
interconnectedness, making economies more susceptible to external shocks and crises.

7. **Diminishing Power of Nation States:** Some argue that globalization weakens the authority
and control of nation-states as global forces, like multinational corporations, gain influence and
power.

8. **Loss of Cultural Identity:** The spread of global culture and values can sometimes lead to the
erosion of local traditions, languages, and cultural identities.
9. **Shift of Power to Multinationals:** Globalization allows multinational corporations to operate
across borders, sometimes exerting significant economic and political influence, which can challenge
the authority of governments.

Globalisation refers to the movement of ideas, capital, commodities, and people. The capacity of
ideas, capital, commodities, and people to flow more readily from one region of the world to another
is primarily due to technical improvements. Globalisation has political, economic, and cultural
expressions, all of which must be recognised. The critical component is the global
interconnectedness that is produced and maintained as a result of such ongoing movement.

EXAMPLE

Imagine a cup of coffee you enjoy in a cafe in New York City:

- **Coffee Beans:** The coffee beans might come from Colombia, Ethiopia, Brazil, or other coffee-
producing countries. These beans are grown, harvested, and processed in these countries.

- **Trade and Transportation:** The beans are then exported to various parts of the world. They are
transported via ships or planes, often passing through multiple countries and continents.

- **Roasting and Packaging:** Once imported, the beans might be roasted in a facility in the United
States or another country, where they are then packaged and prepared for distribution.

- **Cafe or Retail:** The packaged coffee is distributed to cafes, grocery stores, or coffee shops
worldwide, including the one in New York City where you purchase it.

- **Consumer Enjoyment:** You, as a consumer, get to enjoy this cup of coffee that has traveled
across borders and continents to reach your hands.

Imagine buying a piece of clothing, like a T-shirt, from a store in Paris, France:

- **Design and Creation:** The design of the T-shirt might originate from a fashion designer in Italy,
with inspiration drawn from trends seen in Tokyo, Japan, and New York City, USA.

- **Raw Materials:** The cotton used for the T-shirt could be grown in India or Egypt, while the dyes
might come from China. These materials are sourced from various countries across continents.

- **Manufacturing:** The fabric might be woven and dyed in Bangladesh or Vietnam due to lower
production costs. The garment is then stitched together in a factory in Southeast Asia.

- **Logistics and Distribution:** Once manufactured, the T-shirt is transported across continents via
ships or planes. It might pass through various ports and distribution centers in different countries.
- **Retail and Consumer Purchase:** The T-shirt reaches a retail store in Paris, where a customer
purchases it and takes it home.

Sure, let's simplify these scenarios!

Coffee Story:

- **From Faraway Farms:** Beans grow in places like Colombia or Brazil.

- **Around the World:** They travel by boat or plane to the U.S.

- **Roasting Time:** They're roasted, packed, and sent to cafes.

- **In Your Cup:** You enjoy a cup in NYC!

T-shirt Tale:

- **Design Journey:** Ideas from Italy, inspired by places like Tokyo and NYC.

- **Materials Mix:** Cotton from India or Egypt, dyes from China.

- **Making Process:** Fabric crafted in places like Bangladesh, sewn in Southeast Asia.

- **Parisian Pick:** It lands in a Paris store and is bought by someone.

INTERNATIONAL ORGANIZATIONS

WTO(notes)

Role of WTO

Principles of WTO(notes)

Functions of WTO(notes)

Key Differences Between GATT and WTO

The points given below explain the difference between GATT and WTO in detail:

1. GATT refers to an international multilateral treaty, signed by 23 nations to promote

international trade and remove cross-country trade barriers. On the contrary, WTO is a
global body, which superseded GATT and deals with the rules of international trade between
member nations.
2. While GATT is a simple agreement, there is no institutional existence, but have a small
secretariat. Conversely, WTO is a permanent institution along with a secretariat.
3. The participating nations are called as contracting parties in GATT, whereas for WTO, they
are called as member nations.
 4. GATT commitments are provisional in nature, which after 47 years the government can
make a choice to treat it as a permanent commitment or not. On the other hand, WTO
commitments are permanent, since the very beginning.
5. The scope of WTO is wider than that of WTO in the sense that the rules of GATT are applied
only when the trade is made in goods. As opposed to, WTO whose rules are applicable to
services and aspects of intellectual property along with the goods.
6. GATT agreement is primarily multilateral, but plurilateral agreement is added to it later. In
contrast, WTO agreements are purely multilateral.
7. The domestic legislation is allowed to continue in GATT, while the same is not possible in the
case of WTO.
8. The dispute settlement system of GATT was slower, less automatic and susceptible to
blockages. Unlike WTO, whose dispute settlement system is very effective.

IMF

The formation of the IMF was initiated in 1944 at the Bretton Woods Conference. IMF came into
operation on 27th December 1945 and is today an international organization that consists of 189
member countries. Headquartered in Washington, D.C., IMF focuses on fostering global monetary
cooperation, securing financial stability, facilitating and promoting international trade, employment,
and economic growth around the world. The IMF is a specialized agency of the United Nations.

Role of IMF

Functions of IMF

IMF mainly focuses on supervising the international monetary system along with providing credits to
the member countries. The functions of the International Monetary Fund can be categorized into
three types:

1. Regulatory functions: IMF functions as a regulatory body and as per the rules of the Articles
of Agreement, it also focuses on administering a code of conduct for exchange rate policies
and restrictions on payments for current account transactions.
2. Financial functions: IMF provides financial support and resources to the member countries
to meet short term and medium term Balance of Payments (BOP) disequilibrium.
3. Consultative functions: IMF is a centre for international cooperation for the member
countries. It also acts as a source of counsel and technical assistance.

Reasons of Formation of IMF

The breakdown of international monetary cooperation during the Great Depression led to the
development of the IMF, which aimed at improving economic growth and reducing poverty around
the world. The International Monetary Fund (IMF) was initially formed at the Bretton Woods
Conference in 1944. 45 government representatives were present at the Conference to discuss a
framework for postwar international economic cooperation.
The IMF became operational on 27th December 1945 with 29 member countries that agreed to
bound to this treaty. It began its financial operations on 1st March 1947. Currently, the IMF consists
of 189 member countries.

The IMF is regarded as a key organisation in the international economic system which focuses on
rebuilding the international capital along with maximizing the national economic sovereignty and
human welfare.

IBRD

International Bank for Reconstruction and Development (IBRD)

The IBRD calls itself a global development cooperative. It has a membership of 189 countries.

 It is the world’s largest development bank.

 It provides loans, guarantees, advisory services, and risk management products to middle-
income and creditworthy low-income countries.
 Middle-income countries represent more than 60% of the IBRD’s portfolio.
 IBRD finances investments across all sectors and offers technical support and expertise at
every stage of a project.
 IBRD deals only with sovereign governments and not private players.
 It also assists governments in augmenting the investment climate of countries, removing
service delivery bottlenecks, and strengthening institutions and policies.
 IBRD sources most of its funds from the world’s financial markets.
IBRD and India

 India is a founding member of IBRD.

 It started lending to India in 1949, the first project being undertaken for the Indian Railways.
 Since the 1960s, the IBRD is an important source of long-term funding for India.
 India is the largest IBRD client of the World Bank.
 India is a blend country, which means it is transitioning from a lower-middle-income to a
middle-income country.
 India is eligible for loans from both the IBRD and the IDA.

Conclusion

The International Bank for Reconstruction and Development refers to a global development
cooperative owned by 189 member countries. It is also known as the World Bank. IBRD was
established along with the International Monetary Fund (IMF) to safeguard Europe during World
War II.

The International Bank for Reconstruction and Development lends money to Middle-income as well
as low-income countries.
IBRD provides numerous services which include risk management products, information, and
advisory services to governments working at the National level as well as International level.

International business is the exchange of goods and services across borders. It includes the entire
spectrum of cross-border exchanges of products, services, or resources between two or more
countries.

Reasons to Undertake International Business

1. **Market Expansion:** Accessing new markets can significantly increase potential customer bases
and revenue streams. Expanding globally allows businesses to tap into diverse demographics and
consumer behaviors.

2. **Profit Potential:** Operating in multiple countries can provide opportunities for higher profits.
Emerging markets often offer lower production costs, while established markets may provide
premium pricing opportunitieS

3. **Risk Diversification:** Relying solely on one market can be risky. International operations can
spread risks across different economies, reducing vulnerability to regional economic downturns or
political instability.

4. **Access to Resources:** International business facilitates access to diverse resources, including

raw materials, skilled labor, and technologies not readily available domestically, enabling cost-
effective production and innovation.

5. **Competitive Advantage:** Global presence can enhance competitiveness by leveraging unique

advantages, such as technology, expertise, or brand recognition, giving an edge over local
competitors.

6. **Economies of Scale:** Operating in multiple markets often allows for economies of scale in
production, distribution, and marketing, resulting in cost savings and increased efficiency.

7. **Diverse Talent Pool:** Expanding internationally enables businesses to tap into a more
extensive talent pool. Accessing diverse skill sets and perspectives can foster innovation and
creativity within the organization.

8. **Learning and Adaptation:** International business requires adaptation to different cultures,

regulations, and market trends, fostering organizational learning and agility, which can benefit the
company's overall strategies and operations.

Differnce Btw international and domestic business

The most important differences Between domestic and international business are classified as
under:

 Domestic business is defined as a company whose economic transactions are done within
the country’s borders. International business is defined as a business that is not limited to a
single country, i.e. a business that transacts with several countries throughout the world.
 The area of operation of the domestic business is limited, which is the home country. On the
other hand, the area of operation of an international business is vast, i.e. it serves many
countries at the same time.
 A domestic business’s quality criteria for products and services are generally low.
International companies, on the other hand, have very high quality requirements that are
set according to global norms.
 Domestic business conducts its operations in the currency of the country in which it is based.
International trade, on the other hand, is conducted in a variety of currencies.
 When opposed to foreign companies, domestic business requires far less capital investment.
 Domestic business is subject to minimal constraints since it is governed by the laws and
taxation of a single country. International trade, on the other hand, is subject to the
regulations, laws, taxes, tariffs, and quotas of many nations, and as a result, it is subject to
numerous limitations that act as obstacles to international trade.
 Customers in a domestic business are more or less the same. In contrast, international
companies have a diverse range of clients from each country it services.
 In a domestic firm, conducting market research is simple. In contrast, doing business
research is challenging in international research since it is expensive and research
dependability differs from country to country.
 Factors of production are moveable in domestic companies, but they are constrained in
foreign business.

Pros and cons of International business

Advantages

1. Access to New Markets: International business allows companies to access new markets and

tap into the global population. Companies can expand their customer base by entering new

markets, diversifying their customer base, and offering more products and services. It allows

them to increase their revenue and profits.

2. Increased Economies of Scale: Companies can improve their economies of scale by

expanding into foreign markets. They can take advantage of lower labor costs, production

costs, and access to new resources. It can help them to produce more goods and services at

a lower cost and increase their profit margins.

3. Enhanced Profitability: Companies that engage in international business can benefit from

increased sales and profits. Companies can increase their sales and profits by expanding into

new markets and offering new products. It can help them to become more competitive in

the global marketplace.

 4. Increased Competition: Companies can increase their competitiveness by entering new

markets. It can help improve the quality of their products and services and reduce their

prices. It can help them to remain competitive in the global marketplace.

5. Diversification: Companies can diversify their business by entering new markets. It can help

to spread financial risks and reduce their overall risk profile. It can also help them to access

new resources and increase their revenue potential.

6. Improved Access to Resources: Companies can access new resources by expanding into

international markets. It can help them reduce production costs and improve their products

and services. It can also help them to access new resources and increase their profits.

7. Greater Job Opportunities: Companies that engage in international business can create new

job opportunities. It can help to reduce unemployment and provide new opportunities for

people in other countries. It can also help to reduce poverty in developing countries.

Disadvantages

1. Political Risks: Political risks refer to the uncertainty created by changes in a country’s laws,

regulations, and government policies. Political risks can include changes to a country’s tax

laws, tariffs, and other rules that can affect the profitability of a business. Companies

operating in countries with unstable governments or volatile political climates can be

particularly vulnerable to these risks.

2. Exchange Rate Risk: Exchange rate risk is when changes in the exchange rate between two

countries’ currencies could adversely affect a business’s financial performance. Companies

that conduct business in multiple currencies or have a large percentage of their costs or

revenues denominated in a foreign currency are particularly vulnerable to changes in

exchange rates.
 3. Cultural Barriers: Cultural barriers are differences in how people from different countries

view the world. These differences can make it difficult to do business in other countries, as

these cultural differences may hinder communication, negotiation, and decision-making.

4. Language Barriers: Language barriers can be a significant obstacle to doing business

internationally. Companies need to be able to communicate effectively with their

international partners to avoid misunderstandings and mistakes that can be costly.

5. Difficulty in Protecting Intellectual Property: Intellectual property is a crucial asset for many

companies, but protecting it cannot be accessible in international markets. Laws governing

intellectual property protection vary from country to country, making it difficult for

companies to protect their intellectual property rights in some markets.

6. High Transportation Costs: The expenses incurred in the international transportation of

goods can be substantial. Transportation costs can significantly increase the cost of doing

business internationally depending on the type of product and the distance it needs to

travel.

7. Tariffs and Quotas: Tariffs and quotas are government-imposed restrictions on importing and

exporting goods. Tariffs are taxes imposed on imported goods, while quotas limit the number

of goods imported into a particular country. These restrictions can significantly increase the

cost of doing business internationally.

Certainly! Apple, a US company, designs iPhones, iPads, and Macs. They work with Foxconn, a
company in China, to build these devices. Foxconn puts the parts together in their factories in China.
Parts come from different countries, like screens from South Korea and chips from Japan. Once
assembled, these devices are sold all over the world, from America to Europe and Asia.

This shows how companies like Apple use partners in other countries, like Foxconn in China, to make
and sell products globally. They bring together parts from many places to create and sell devices to
people all around the world.

Absolutely! Coca-Cola, an American company famous for its soft drinks, operates globally. They have
bottling plants and distribution centers in many countries around the world. To suit local tastes,
Coca-Cola adjusts its drink recipes slightly in different places. This means you might find variations of
Coca-Cola with different levels of sweetness or flavors depending on the region. The ingredients for
Coca-Cola drinks, like sugar and flavorings, often come from different countries. These ingredients
are mixed, bottled locally, and then distributed to stores and markets globally. Coca-Cola's success
demonstrates how a company can adapt its products for various markets while maintaining a global
presence, sourcing materials from different locations and catering to diverse consumer preferences
worldwide.

Free Trade vs Protection

Protectionism vs Free Trade - Simplicable

Reasons for Imposing Tarrif Barriers

When two countries trade in the goods, a certain amount is charged as a fee by the country, in
which goods are entered, so as to provide revenue to the government as well as raise the price of
foreign goods, so that the domestic companies can easily compete with the foreign items. This fee is
in the form of tax or duty, which is called a tariff barrier.

The amount of tax or duty charged as tariff is added to the cost of the import, which makes the
foreign goods more expensive, whose price is ultimately borne by the consumer of the products. The
tariff is paid to the customs authority of the country in which goods are sent.

Non-tariff barriers refer to non-tax measures used by the country’s government to restrict imports
from foreign countries. It covers those restrictions which lead to prohibition, formalities or
conditions, making the import of goods difficult and decrease market opportunities for foreign
items.

These are quantitative and exchange control that affects the trade volume or prices, or both.

It can be in the form of laws, policies, practices, conditions, requirements, etc., which are specified
by the government to restrict import.

1. **Protecting Domestic Industries:** Tariffs can shield local industries from foreign competition by
making imported goods more expensive. This protection aims to safeguard jobs and prevent the
collapse of industries that might struggle to compete with cheaper imports.

2. **National Security:** Countries may impose tariffs on certain goods or industries that are
deemed critical for national security. This can include products like steel, defense equipment, or
technology that is vital for a nation's defense infrastructure.

3. **Correcting Trade Imbalances:** Tariffs can be used as a tool to address trade deficits by making
imports more expensive relative to domestically produced goods. This can theoretically encourage
consumers to buy local products, reducing the trade deficit.

4. **Revenue Generation:** Governments can use tariffs as a source of revenue. Import tariffs can
generate income for the government, especially if there are no other sources of revenue like income
tax or sales tax.

5. **Retaliation or Diplomatic Purposes:** Tariffs might be imposed as a response to another

country's trade practices deemed unfair. They can be used as a tool in diplomatic negotiations or as
a form of retaliation for trade policies perceived as harmful to one's own country.
6. **Environmental or Health Protection:** Tariffs can be used to discourage the importation of
goods that don’t meet certain environmental or health standards. This promotes domestic industries
adhering to higher standards and discourages imports that could pose risks to health or the
environment.

7. **Strategic Economic Policy:** Governments may use tariffs as part of a broader economic
strategy. For instance, they might impose tariffs to encourage the development of specific industries
or to incentivize foreign companies to establish production facilities within the country.

### Example 1: US-China Trade Dispute (Tariff as Retaliation)

In recent years, the United States and China engaged in a trade dispute, imposing tariffs on each
other's goods. The US imposed tariffs on various Chinese imports like electronics and machinery,
citing unfair trade practices and intellectual property concerns. In response, China levied tariffs on
American products such as soybeans and automobiles. This tariff escalation between the two
countries aimed to address trade imbalances and as a form of diplomatic pressure to negotiate fairer
trade terms.

### Example 2: European Union's Environmental Tariffs

The European Union (EU) introduced environmental tariffs on products that don't meet their
sustainability standards. For instance, the EU imposed tariffs on certain imported goods like timber
or seafood that were obtained through unsustainable practices. These tariffs were intended to
discourage the importation of products that harm the environment and incentivize adherence to
higher environmental standards in international trade.

Economic,political,legal,social,cultural environment (NOTES)

Balance of Trade

 A balance of payment is a collection of accounts that demonstrates a country's business

transactions with other countries over a period of time. During that time period, these
accounts reflect every monetary transaction, including commodities, services, and incomes.
 The main component of a country's balance of payments is the balance of trade, which is
the difference between the value of its imports and exports for a given time.
 The phrase "trade" relates to the purchase and sale of things. When it is done on a global
basis, however, it is referred to as imports and exports.
 The Balance of Trade (BOT) refers to a country's economy's imports and exports throughout
a given year.
 Only visible items are recorded by BOT.
 A trade deficit occurs when a country imports more goods and services than it exports in
terms of value.
 A trade surplus occurs when a country exports more goods and services than it imports.
 Between 1957 and 2021, India's Balance of Trade averaged -2.97 USD Billion, with a
maximum of 0.79 USD Billion in June 2020 and a low of -22.91 USD Billion in November
2021.

Significance of Balance of Trade

  BOT depicts the fluctuations in a country's imports and exports over time.
 When a country achieves equal status in terms of imports and exports, this is referred to
as Trade Equilibrium.
 However, if the former exceeds the latter, a trade deficit is created, which is not a good
condition for a country.
 When the value of exports exceeds the value of imports, a Trade Surplus is created, putting
an economy in a better position.
 The current account includes a country's balance of trade.

### Example 1: US Trade Deficit with China

The United States has experienced a consistent trade deficit with China over recent years. The
value of goods and services imported from China exceeded what the US exported to China. This
trade deficit highlighted the imbalance in trade between the two countries and impacted
industries such as electronics and apparel. The US imported more goods, leading to concerns
about job losses and the competitiveness of domestic industries.

### Example 2: Germany's Trade Surplus

Germany has consistently maintained a trade surplus, exporting more goods and services than it
imports. This trade surplus has been a significant characteristic of the German economy, with
strong exports in automotive, machinery, and technology sectors. The surplus bolstered
Germany's economic position, generating revenue from exports and contributing to its strong
manufacturing and export-oriented industries.

Balance of Payment
The balance of payment is the statement that files all the transactions between the entities,
government anatomies, or individuals of one country to another for a given period of time. All the
transaction details are mentioned in the statement, giving the authority a clear vision of the flow of
funds.

After all, if the items are included in the statement, then the inflow and the outflow of the fund
should match. For a country, the balance of payment specifies whether the country has an excess or
shortage of funds. It gives an indication of whether the country’s export is more than its import or
vice versa.

Importance of Balance of Payment

A balance of payment is an essential document or transaction in the finance department as it gives

the status of a country and its economy. The importance of the balance of payment can be
calculated from the following points:

 It examines the transaction of all the exports and imports of goods and services for a given
period.
 It helps the government to analyse the potential of a particular industry export growth
and formulate policy to support that growth.
  It gives the government a broad perspective on a different range of import and export
tariffs. The government then takes measures to increase and decrease the tax to discourage
import and encourage export, respectively, and be self-sufficient.
 If the economy urges support in the mode of import, the government plans according to
the BOP, and divert the cash flow and technology to the unfavourable sector of the
economy, and seek future growth.
 The balance of payment also indicates the government to detect the state of the
economy, and plan expansion. Monetary and fiscal policy are established on the basis of
balance of payment status of the country.
Conclusion:

 The recent BoP trends have been positive for the Indian economy, but there are also some
medium-term concerns.
 By keeping a close eye on the BoP trends, policymakers can make informed decisions to
ensure the stability and growth of the Indian economy.

Example 1: United States' Balance of Payments

The United States regularly experiences a current account deficit in its balance of payments.
Despite being a leading global economy, the US imports more goods and services than it exports,
creating a trade imbalance. This deficit is offset by capital inflows from foreign investors who buy
US assets like government bonds or invest in American companies. While the US has a current
account deficit, it maintains a surplus in its capital and financial accounts, demonstrating how a
country's balance of payments reflects not just trade but also financial flows.

### Example 2: Germany's Surplus in Balance of Payments

Germany consistently maintains a surplus in its balance of payments. Known for its strong
export-oriented economy, Germany exports more goods and services than it imports. This
surplus reflects a robust trade performance, particularly in industries like automotive,
machinery, and technology. The surplus in the balance of payments contributes to Germany's
financial strength, allowing it to invest abroad and maintain a strong position in global trade.

FDI

 A foreign direct investment (FDI) is a financial investment made by a party from one
country into a business or corporation in another country with the intention of establishing
a long-term partnership.
 Foreign direct investment can take the form of obtaining a long-term interest or expanding
one's business into a foreign country.
 Foreign Direct Investment (FDI) is common in open economies with a skilled workforce and
good growth prospects.
 Foreign direct investment (FDI) brings more than simply money; it also brings skills,
technology, and knowledge.
 Foreign companies invest in India to benefit from reduced salaries and other unique
investment benefits such as tax breaks.
 Foreign enterprises participating in FDI are closely involved in the other country's day-to-
day operations.

 The determinants of FDI in host countries are:

 Policy framework

 Rules with respect to entry and operations/functioning (mergers/acquisitions and

competition)

 Political, economic and social stability

 Treatment standards of foreign affiliates

 International agreements

 Trade policy (tariff and non-tariff barriers)

 Privatisation policy

Advantages Of FDI

 Foreign direct investment can help boost the economy of the country where it is produced,
boosting local businesses while also creating a more favorable environment for the investor.
Foreign direct investment helps emerging economies.
 Foreign direct investment helps with technology spillovers, human capital creation, and
international commerce integration.
 Foreign knowledge may be a critical component in improving a country's current technical
processes, and technological and process advancements boost a country's domestic
competitiveness.
 It also contributes to the development of a more competitive business environment and
the expansion of small firms.
 All of these variables contribute to improved economic growth, which is the most efficient
way to reduce poverty in developing countries.

Disadvantages of FDi

 Foreign direct investment and exchange rate limitations may be harmful to the country that
is investing.
 By moving resources elsewhere, it can sometimes impede local investment.
 Exchange rates are occasionally manipulated as a result of foreign direct investment, to one
country's benefit and the other's detriment.
 Foreign direct investment can be capital-intensive from the investor's standpoint, making it
high-risk or economically viable at times.
 Ways of FDI /modes

Types of FDI

 With a horizontal FDI, a company establishes the same type of business operation in a
foreign country as it operates in its home country. A U.S.-based cellphone provider buying a
chain of phone stores in China is an example.
 In a vertical FDI, a business acquires a complementary business in another country. For
example, a U.S. manufacturer might acquire an interest in a foreign company that supplies
it with the raw materials it needs.
 In a conglomerate FDI, a company invests in a foreign business that is unrelated to its core
business. Because the investing company has no prior experience in the foreign company’s
area of expertise, this often takes the form of a joint venture.

Certainly!

### Example 1: Walmart & Flipkart in India

Walmart, a US retail giant, invested in India by teaming up with Flipkart, an Indian e-commerce
company. This allowed Walmart to enter India's retail sector and brought expertise to Flipkart.
The partnership boosted Flipkart's logistics and gave Walmart a strong foothold in India's
market.

### Example 2: Nissan's UK Investment

Nissan, a Japanese automaker, invested in the UK to manufacture cars for Europe. This brought
advanced technology, jobs, and growth to the UK's auto industry, showcasing how FDI can
benefit a country's manufacturing and job market.

Theories of International Trade

Implication of Trade Theories

Trade theories provides the conceptual base for international trade and shifts in trade patterns.
They also facilitate in understanding the basic reasons behind the evolution of a country as a
supply base or market for specific products.
1. Mercantilism Theory

 This theory was given by Thomas Mun and was Popular in the 16th and 18th Centuries.
 During that time, the Wealth of nations was measured by the stock of gold and other kinds
of metals. The primary goal is to increase the wealth of the nation by acquiring gold.
 This theory says that a country should increase gold by promoting exports and discouraging
imports.
  It is based on a zero-sum game. Zero-sum means only one nation gets benefits by exporting
and the other gets a loss by importing goods.
Assumptions
1. There is a limited amount of wealth i.e. Gold in the world.
2. A nation can only grow when other nations do expenses or import goods.
3. A nation should try to achieve & maintain a favourable trade balance ( exporting more than its
import).

Disadvantages
1. Mercantilism theory only thinks about producing and exporting goods. This hardly paid attention
to the welfare of workers which leads to the exploitation of workers.
2. Mercantilism was one-way traffic. It focuses on export but not import, it is not easy to be self-
sufficient. Many countries of Europe fails to be self-sufficient which increased their miseries.

### Spain's Gold Rush in the Americas

Spain, in the 16th century, pursued a mercantilist approach, seeking wealth through gold and silver
from its American colonies. The emphasis on exporting precious metals backfired, neglecting other
industries in the colonies and causing economic imbalances, leading to challenges within Spain and
its colonies.

2. Absolute Advantage Theory

a) This theory was given by Adam Smith in 1776. He argued for mercantilist theory & said that theory
doesn’t expand trade.
b) This trade theory is based on a positive-sum game and expansion of trade. A positive-sum game
means both countries get benefits in trade. In this, both countries export absolute advantage goods
to each other.
c) Absolute advantage means when a country can produce a product more effectively ( less cost,
more natural resources to produce easily ) than other countries.
d) Both nations should export goods of production advantage and import goods of production
disadvantage.

For example – India has an absolute advantage in producing cotton and brazil has in producing
coffee. In this, both countries should supply production advantages to each other.

Disadvantage
1. This theory Fails to explain how free trade can be advantageous to two countries when one
country can produce all goods.
2. Any nation not having an absolute advantage can’t gain from free trade.
3. Differences in climatic conditions & natural resources in nations won’t lead to absolute advantage.
3. Comparative Advantage

a) It is developed by David Ricardo in 1817.

b) This theory is the extension of the absolute advantage theory. i.e. If a country has an advantage in
the production of two commodities, then compare the efficiency of both goods.
c) Produce and Export the good which can be produced more efficiently.

Example – India can produce both trucks and cars efficiently but for export, India needs to compare
these goods with each other to find which goods have more efficiency. If car production has more
efficient then India should produce and export manufactured cars.

Disadvantages
1. This theory was based on only two countries & only two commodities, but international trade is
among many countries with many commodities.
2. The Assumption of full employment helps theory to explain comparative advantage. The cost of
production in terms of labour may change when the employment level increases or decreases.
3. Even if any country stopped production, nobody in the industry wants to lose their job.
4. Another disadvantage is that transportation costs are not considered in determining comparative
cost differences.

New Trade Theory

a) It is given by Paul Krugman in 1980.

b) This theory tells about some of the necessary factors. A country having one of these factors can
become an exporter.

Those three necessary factors are

Economies of scale – Making production at a large scale for Reduction in per-unit cost
Product differentiation – Difference in colour, durability, brand, etc.
First mover advantage – Capturing the market by introducing a new product or market.

Disadvantages
1. Only applicable when there are many firms with different production processes so it can change
products easily.
2. Assumes that all firms are well-formed, which may not be true in every case.

Porter’s Diamond Theory(competitive theory )

a) Introduced by Michael Porter in his book ‘The Competitive Advantage of Nations in 1990.
b) It is also known as National Advantage Trade Theory.
c) Explains factors that are available to a nation. These factors can give a competitive advantage to
the economy of a country.
d) Four factors together form “PORTER’S DIAMOND MODEL”.
1. Factor Condition – Factors available like labour, capital, land, etc
2. Related & Supported Industries – Supporting companies to get raw material, transportation, etc
3. Strategy, Structure, Rivalry- How many Competitors and what structure they are using in the sale,
marketing, etc
4. Demand Condition- How much demand for goods are there, what are the needs of people,
country, etc
e) Export goods from that industry where the diamonds are favourable.

Disadvantages
1. In his book, Porter was optimistic about the future of Korea & less optimistic about the future of
others.
2. Other factors may influence success – there may be events that could not have been predicted,
such as new technological developments or government interventions.

### Japan's Automotive Success

Japan's prowess in the automotive industry mirrors Porter's Diamond Theory. Factors like skilled
labor, advanced tech, and strong supporting industries propelled its competitive advantage. Their
focus on innovation, quality, and meeting global demands solidified Japan's dominance in producing
reliable, fuel-efficient vehicles. This example illustrates how Porter's Diamond Model explains a
nation's success in a specific industry.

Trade Bloc

A trade bloc (or trading bloc) is a type of agreement between governments where barriers to
international trade are eliminated or reduced between participating nations/regions.

Reducing or eliminating barriers (such as tariffs and non-tariffs) allows members within the
agreement to trade amongst each other more easily and freely. The point is also to establish
guidelines when trading with non-members, which can have an impact on global trade patterns.

Reasons of Formation of Trade Block

Trade blocks, or regional trade agreements, are formed for several reasons:

1. **Economic Integration:** Nations come together to form trade blocs to promote economic
cooperation and integration. By reducing trade barriers among member countries, they aim to boost
trade, investment, and economic growth within the region.

2. **Market Access:** Trade blocs offer member countries increased access to each other's markets.
This expanded market access can lead to more opportunities for businesses to sell their goods and
services within the bloc without facing certain tariffs or trade barriers.
3. **Enhanced Competitiveness:** By creating a larger, unified market, trade blocs enable member
countries to achieve economies of scale. This can make industries more competitive globally, as
companies within the bloc can produce goods more efficiently and cost-effectively.

4. **Political Cooperation:** Beyond economic benefits, trade blocs often foster closer political ties
among member nations. Enhanced cooperation can lead to improved diplomatic relationships and
collaboration on various regional and global issues.

5. **Reduced Dependency:** Trade blocs aim to reduce dependency on external markets and
resources by strengthening trade ties within the bloc. This can provide a level of stability and
security, especially during global economic fluctuations.

6. **Harmonization of Standards and Regulations:** Trade blocs often work towards standardizing
regulations and trade policies among member countries. This can streamline trade processes, reduce
red tape, and create a more predictable environment for businesses.

7. **Negotiating Power:** Collectively, member countries of a trade bloc often have more
negotiating power in international trade discussions. They can bargain from a stronger position
when dealing with non-member countries or in global trade agreements.

TyPes of Major Trade Bloc

Preferential Trade Area

A preferential trade area has low levels of commitment when it comes to reducing trade barriers. In
other words, members will reduce or eliminate tariff barriers on certain goods from other members.
It doesn’t address how to work with non-members.

Free Trade Area

With a free trade area, members remove all trade barriers, leaving them free to import and export
goods and services between them. Members can maintain their independent trade policies with
non-members.

Customs Union

Member countries in a customs union remove all trade barriers and adopt policies/external tariffs
when dealing with non-members. As a single trade block, members within a customs union can
negotiate with other trading blocs or third-parties like the World Trade Organization (WTO).
Common Market

Members in a common market will eliminate internal trade barriers, adopt common policies for non-
members, and allow a free movement of resources (like labor). The East African Common Market is
one such example of an economic union.

Economic Union

In addition to eliminating trade barriers, adopting common barriers for non-members and allowing a
free movement of resources, an economic union also adopts similar economic policies. For example,
the European Union (i.e. EU trade bloc) has adopted a common currency.

Political Union

A political union is like a big team effort among MEMBER countries. They not only work together on
their economies but also agree on safety and foreign policies. To make this work, they set up a
shared parliament with representatives from each member country. These representatives
collaborate with their own country's government to make decisions that benefit everyone involved.

Regional Trade Block

A regional trading bloc is a collection of countries within a geographical region that band together to
protect themselves from non-member goods. A trade bloc is a free-trade zone (or near-free-trade
zone) created by one or more tax, tariff, and trade agreements between two or more countries

Advantages of Regional Trade Block

1. **Free Trade Within the Bloc:** Members can specialize in what they do best because they can
easily sell to each other. This boosts trade within the region using the idea of comparative
advantage.

2. **Market Access & Trade Creation:** Easier access to each other's markets leads to increased
trade between members. Cheaper imports replace higher-cost domestic goods, benefitting
consumers with lower prices and higher demand.

3. **Economies of Scale:** Producers can benefit from economies of scale, reducing costs and
offering consumers lower prices due to larger production.
4. **Job Creation:** Increased trade between member countries can create jobs. Economic
integration can improve job prospects by making it easier for people to work in different member
countries.

5. **Protection:** Industries within the bloc are shielded from cheaper imports from outside. For
example, the EU protects its industries from low-cost imports, ensuring competitiveness.

6. **Consensus & Cooperation:** It's easier for fewer countries to agree. Close cooperation within
the region can also lead to better political ties and understanding among member nations.

Disadvantages of Regional Trading Blocs

- Loss of free trade benefits: Trading blocs erode the advantages promised by free trade among
nations.

- Distorted global commerce: These blocs can disrupt global trade, hindering specialization and the
exploitation of comparative advantages.

- Inefficiencies and trade diversion: Less efficient producers within blocs are shielded from
competition with more efficient producers outside, leading to trade diversion. This diverts
commerce away from efficient producers, creating additional trade barriers.

- Retaliation and trade conflicts: The growth of one trading bloc often sparks the growth of others,
leading to trade conflicts and retaliatory measures between blocs.

- Employment shifts and reductions: Production might shift to member countries with lower labor
costs, causing workforce shifts and potentially straining resources in these countries.

Regional Trade agreement

It is an agreement between two or more countries in a particular region to promote free trade and
economic cooperation. RTAs are designed to reduce barriers to trade and investment and to create a
more seamless flow of goods, services, and capital among participating countries.

Advantages of Regional Trade agreement

 Regional trade agreements can help reduce trade barriers and promote economic growth

 They can also make it easier for businesses to export goods and services to other countries
in the region

 RTAs can help create jobs and improve living standards

  They can also help promote peace and stability in the region

 RTAs can be a way for countries to cooperate on issues such as environmental protection
and the fight against terrorism

Disadvantages of Regional Trade agreement

 RTAs can lead to trade diversion, which means that countries may start importing goods
from other members of the RTA instead of from the most efficient suppliers outside the RTA

 RTAs can also lead to higher prices for consumers since competition is reduced and
companies may have less incentive to keep prices low

 RTAs can create a “spaghetti bowl” effect, where different agreements overlap and create
confusion for businesses trying to trade goods and services

 RTAs can also lead to regulatory divergence, which means that the regulations of different
countries within an RTA may start to diverge over time, creating more red tape and
complexity for businesses

 Finally, RTAs can reduce global trade liberalization, if they are used as a way to “backdoor”
protectionist measures that would not be allowed under the rules of the World Trade
Organization (WTO)

Major Regional Trade Agreements

Certainly! Here's an overview of each of these trade blocs:

1. **European Union (EU):** The EU is one of the most comprehensive and integrated trade blocs. It
consists of 27 European countries that have established a single market, allowing the free movement
of goods, services, capital, and people among member states. The EU also has a common trade
policy and a unified currency (the Euro) used by 19 member countries.

2. **North American Free Trade Agreement (NAFTA) / United States-Mexico-Canada Agreement

(USMCA):** NAFTA was a trade bloc involving the United States, Canada, and Mexico, aimed at
eliminating tariffs and promoting trade among these countries. In 2020, NAFTA was replaced by the
USMCA, which modernized and updated certain aspects of the agreement while maintaining the
basic framework of the trade bloc.

3. **South Asian Free Trade Area (SAFTA):** SAFTA was established by the South Asian Association
for Regional Cooperation (SAARC) to promote trade and economic cooperation among its member
countries in South Asia. It aims to reduce tariffs and barriers to trade among nations like India,
Pakistan, Bangladesh, and others in the region.

4. **Mercosur:** Mercosur is a trade bloc in South America that includes Argentina, Brazil,
Paraguay, and Uruguay as full members, with several other associate members. It aims to promote
free trade and the movement of goods, people, and currency among member countries.

5. **Gulf Cooperation Council (GCC):** The GCC comprises six Middle Eastern countries: Saudi
Arabia, Kuwait, the United Arab Emirates, Qatar, Bahrain, and Oman. While not a traditional trade
bloc, the GCC aims for economic integration through cooperation in areas like trade, investment,
and joint economic ventures.

6. **Asia-Pacific Economic Cooperation (APEC):** APEC is not a formal trade bloc but a forum that
brings together 21 member economies around the Pacific Rim. It aims to promote economic
cooperation and trade facilitation in the Asia-Pacific region through non-binding agreements and
discussions.

7. **Association of Southeast Asian Nations (ASEAN):** ASEAN consists of ten Southeast Asian
countries that work towards economic integration, regional stability, and political cooperation.
While its primary focus is on economic cooperation and trade liberalization, it also addresses social,
cultural, and security issues among member nations.

FOREIGN EXCHANGE RATE

Foreign Exchange Rate is defined as the price of the domestic currency with respect to another currency.
The purpose of foreign exchange is to compare one currency with another for showing their relative
values.

Foreign exchange rate can also be said to be the rate at which one currency is exchanged with another or it
can be said as the price of one currency that is stated in terms of another currency.

Exchange rates of a currency can be either fixed or floating. Fixed exchange rate is determined by the
central bank of the country while the floating rate is determined by the dynamics of market demand and
supply.

Factors Affecting the Exchange Rate

Exchange rate is impacted by some factors which can be economic, political or psychological as well. The
economic factors that are known to cause variation in foreign exchange rates are inflation, trade balances,
government policies.

Political factors that can cause a change in the foreign exchange rate are political unrest or instability in the
country and any kind of political conflict.
Psychological factors that impact the forex rate is the psychology of the participants involved in foreign
exchange.

Types of Exchange Rate Systems

There are three types of exchange rate systems that are in effect in the foreign exchange market and these
are as follows:

1. Fixed exchange rate System or Pegged exchange rate system: The pegged exchange rate or the fixed
exchange rate system is referred to as the system where the weaker currency of the two currencies in
question is pegged or tied to the stronger currency.

Fixed exchange rate is determined by the government of the country or central bank and is not dependent
on market forces.

To maintain the stability in the currency rate, there is purchasing of foreign exchange by the central bank
or government when the rate of foreign currency increases and selling foreign currency when the rates fall.

This process is known as pegging and that’s why the fixed exchange rate system is also referred to as the
pegged exchange rate system.

Advantages of Fixed Exchange Rate System

Following are some of the advantages of fixed exchange rate system

1. It ensures stability in foreign exchange that encourages foreign trade.

2. There is a stability in the value of currency which protects it from market fluctuations.
3. It promotes foreign investment for the country.
4. It helps in maintaining stable inflation rates in an economy.

Disadvantages of Fixed Exchange Rate System

Following are some of the disadvantages of the fixed exchange rate system

1. There is a constant need for maintaining foreign reserves in order to stabilise the economy.

2. The government may lack the flexibility that is required to bounce back in case an economic shock
engulfs the economy.

2. Flexible Exchange Rate System: Flexible exchange rate system is also known as the floating exchange
rate system as it is dependent on the market forces of supply and demand.There is no intervention of the
central banks or the government in the floating exchange rate system.87

Advantages of Floating Exchange Rate System

Following are the advantages of the floating exchange rate system

1. There is no need to maintain foreign reserves in this exchange system.

2. Any deficiencies or surplus in Balance of Payment is automatically corrected in this system.

Disadvantages of Floating Exchange Rate System

Following are some of the disadvantages of the floating exchange rate system

1. It encourages speculation that may lead to fluctuations in the exchange rate of currencies in the market.

2. If the fluctuations in exchange rates are too much it can cause issues with movement of capital between
countries and also impact foreign trade.

3. It will discourage any type of international trade and foreign investment.

3. Managed floating exchange rate system: Managed floating exchange rate system is the combination
of the fixed (managed) and floating exchange rate systems. Under this system the central banks intervene
or participate in the purchase or selling of the foreign currencies.

**Foreign Exchange Rate - Real Life Example:**

Think about exchanging dollars for euros when you travel. The exchange rate is like a price tag
showing how much one currency is worth in another. For instance, if 1 dollar equals 0.85 euros,
you'd get 0.85 euros for every dollar you exchange.

**Real-Life Impact:**

- If the value of the dollar drops compared to the euro, say to 0.80 euros per dollar, things change:

- Travelers from the U.S. get fewer euros for their dollars, so their trip to Europe becomes more
expensive.

- European businesses selling to the U.S. might sell more because their goods become cheaper for
Americans.

This constant up-and-down of exchange rates affects how much things cost when you travel or buy
stuff from other countries.